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The Cost Of The Bailout Hits Home

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Sep 22, 2008 9:57 pm US/Mountain

The Cost Of The Bailout Hits Home

Good Question: What Does It Mean To Me?

Written By Alan Gionet
Reporting
Alan Gionet
DENVER (CBS4) ― The bailout has a price tag that would baffle a bar code -- $700 billion to maybe a trillion dollars.

"When we say the government, that's us, that's taxpayers," said one woman in Denver. "It means I'm bailing them out, my husband's bailing them out, everybody in this neighborhood is bailing them out."

Former U.S. Senator Hank Brown, now at the University of Colorado, says the cost adds up to a little less than $2,500 per person for everyone in America. But will it really? Will your taxes go up?

"No, it should not result in taxes right away unless we lose money on it," Brown said. "What I think is likely here is we'll probably make money in the long run, but it'll be a couple years out of pocket. I think the impact, negative impact, will be with the federal government borrowing that money that interest rates will be slightly higher than they would have been."

That's because the government will have to borrow or guarantee that money. That means it creates demand for money on the open market and the cost of borrowing would go up. So a car loan, or a next mortgage application could get more expensive.

"Renewing a mortgage probably means higher rates, but you probably face that in any case in this type of crisis," Brown said.

When the U.S. soaks up those bad loans, it will get some good ones with them. Mortgages are packaged together and there's no way of separating the ones that are likely to be paid back, from those that may not be. So the U.S. will buy up packages of good and bad.

"Right now the treasury is talking about going in at 20 to 30 percent of the actual value," Brown said. "That means $100 mortgage might be purchased for 20 to 30 thousand dollars."

If the government is able to sell those off at, for example, 40 percent of their value, the U.S. and taxpayers would come out ahead, even possibly counting the cost of borrowing money to get them. The entity that buys them could also profit -- if they're bought. If the U.S. ends up holding the bag, there's risk, but there's also the potential of reward if, for example, 70 percent of those mortgages are paid back. So going in and propping up the market will help.

"Theoretically this should help ensure that the value of homes don't drop as much as they would with large scale default," Brown said.

Then there's the question of support for homeowners. Congress is considering that. One woman we spoke with in Denver didn't mind. She bought her house 20 years ago and says her retirement is in good shape.

"But I think there are people who need it and I think that if you're going to bail out big corporations then I think you need to consider ... giving assistance to people who have big mortgages," she said.

That could come in softening re-negotiation.

"People who have trouble paying their mortgages will have someone much more willing to negotiate with them and make adjustments to the interest rates or the payment schedule," Brown said. "Anything to avoid foreclosure."

But it's all a gamble. There's more in the video version of the story on the right.

(© MMIX CBS Television Stations, Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.)

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